Why we didn’t invest in your company
You have great early traction, and your initial customers are happy. But you’re having a hard time getting a second meeting with investors. Why?
I was at a startup pitching event last weekend (curated by the amazing folks at NODD). There were a bunch of great startups there, with robust initial traction. We’ll speak to quite a few of them at OperatorVC.
But many didn’t make the cut. Despite the fact that their initial customers are happy. Why? I thought it would be useful to share the three main reasons seed-stage investors say NO to your startup.
- Not solving a deep enough need: If you’re not solving one of the top 3 problems for your customer, you’ll face retention challenges. Sure, you may become a Twitter (and leave egg on my face), but chances are, scaling will be difficult. I’ve written more about this before, in How to save yourself from a bad startup idea that looks good.
- Not a large enough market: This is a tricky one, because the best startups serve markets that are small now, but will become HUGE. But if your market (now / potential) will constrain you from becoming a $100 million business, it’s tough to say Yes.
You may become a solid cash flow generating business, but that’s not VC-scale. For a VC to be interested, you need to have the potential to hit a couple of hundred million dollars in value.
- Not defensible: Competition, per se, isn’t bad. But your solution needs to be defensible at scale — through brand strength, network effects, chain linked strategy, or something else. Which usually means that today, when you’re small, you can’t just be incrementally different (your peers aren’t stupid — they’ll copy you in a heartbeat). You need to be “10x better”.
In fact, defensibility creates the most value for founders. And investors:
“The most important thing to me is figuring out how big a moat there is around the business. What I love, of course, is a big castle and a big moat with piranhas and crocodiles.”- Warren E. Buffett
The articles below share a few more things to be mindful of, when building a startup: